Do you eagerly look forward to the day that you finally no longer need to work? Do you envision yourself finally having the time and money to check off the items on your bucket list, one by one? If your answer is Yes Yes Yes, then you had better start to Plan Plan Plan for your retirement.
The Big “R”
Saving for retirement in a normal bank account is the last place anyone should choose, since it is basically a one-way traffic where only you are working hard for your money, and your money just sits there doing close to nothing. What then are some of the options for retirement planning? From your run-of-the-mill instruments such as endowment policies, unit trusts, and annuities, to more exciting ones such as property, stocks & shares, and business ventures, the options are abound. For the purpose of this article, we will be taking a closer look at the 3 most commonly selected options: endowment policies, unit trusts, and annuities.
Endowment Policies
The 2 most widely asked questions when it comes to endowment policies:
1. How long is my premium payment term.
2. When will the policy mature.
If you are saving for a specific milestone: e.g. to upgrade to your second property, or for your children’s tertiary education, then you should expect a maturity date that coincides with the targeted age for that milestone.
However, the same cannot be said for retirement planning. Because retirement is not an event that happens at a moment in time. Retirement is the start of our final life stage, and it happens across a large span of time. Hence,
1. You may want to limit your premium payment term so that you don’t have to continue paying premiums after you retire.
2. Your policy should not have a fix maturity date. Instead, it should have a ‘cash-out’ date (e.g. 25 years later) from when you can choose to do partial withdrawals as and when you require, and even fully exit the policy. That way, the balance of your policy’s cash value will still have the chance to continue to grow at the projected yield-to-maturity in the meantime.
Unit Trusts
Unlike stocks & shares, unit trusts are by composition, a less volatile form of investments. Though Unit Trusts are supposed to yield a better return compared to endowment policies, but it is very likely that you will fully liquidate your unit trusts before you actually retire.
Because unlike endowment policies whose annual reversionary bonuses once declared become guaranteed, the profit/loss of unit trusts remain non-guaranteed until you liquidate them.
And any sensible investor who is about to retire, will prefer to liquidate their unit trusts to materialize all paper gains. Because if you were to hold on to the unit trusts, and a recession were to occur in the middle of your retirement, you will then be caught between a rock and a hard place.
If you choose not to sell your unit trusts then in the hope of a market rebound, you will not be able to use your unit trusts in the meantime, to fund your retirement. If you choose to sell your unit trusts because you need money to fund your retirement, it will be at a loss or big discount to any prior paper profit.
Hence while considering unit trusts as one of your main options for retirement planning, it is also important to be mindful that once you have fully liquidated them, you will probably have to store that huge stockpile of cash in the bank. And if your retirement lasts from when you are 65 to 85 years old, that stockpile would have suffered significant loss of purchasing power due to inflation.
This is a classic instrument that prior generations have used for retirement planning. But with the introduction of whole-of-life endowment policies, and with our generation having greater knowledge of, and easier access to investments, are annuities slowly losing their relevance today?
1. Annuities give a fixed payout each month, and the payout amount must be decided at the point of purchase. This means if you buy an annuity at age 35, you need to be able to foretell how much money you will require when you retire, e.g. at age 65.
2. Apart from the monthly payout that must be pre-determined, annuities also require you to decide from the start, the age from which you will start receiving the payout. Although some annuities may have the option for you to reinvest back the payouts that you don’t need, but annuities most definitely do not provide the option to receive the payouts earlier.
3. All Singaporeans already participate in CPF Life, which is our national annuity scheme. Should we be adding on another annuity, or perhaps we should diversify and look at the other 2 more common options instead?
The consolation is that you don’t have to figure all these out by yourself. I am here on hand to guide you through this myriad of financial instruments so that you can plan your retirement with a peace of mind.
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